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[ CHARGES ]
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Fees have remained stubbornly
high for too long, so why does
the asset management industry
think it should be trusted to give
investors value for money? Daniel
Lanyon finds out
Guilty as
charged?
A
n apocalypse did not in
the end transpire back in
2012, despite the warnings
of an ancient Mayan
prophecy. In the same year, however,
the Retail Distribution Review
(RDR) did prompt end times for the
dubious commission fees paid to
financial advisers for recommending
investments.
RDR heralded the advent of greater
transparency, which coincided with
an increasing shift to low-cost passive
funds and wider digital disruption
to the investment industry. The
question now is: will fees continue to
fall? And, is this a good thing?
FE TRUSTNET
“Just a couple of percentage points can have a massive
impact on long-term investments such as pensions”
“A slow, lethal killer”
First off, why do people pay so much
attention to fees when the difference
is often just a couple of percentage
points? Tom Selby, senior analyst at
AJ Bell, says that “just a couple of
percentage points” can have a massive
impact on long-term investments
such as pensions, describing high fees
as “a slow, lethal killer”.
Using two extremes of 0.4 per cent at
the bottom end and 1.6 per cent at the
top, he points out that while neither
of these charges sounds massive,
over time the 1.2 percentage point
difference will take a serious toll.
“Take someone with a £100,000
pension pot at age 65 who starts
withdrawing £5,000 a year from their
fund and increases that each year in
line with inflation,” says Selby.
“If we assume a 5 per cent
investment return each year, a 0.4 per
cent charge would see the fund run
dry by age 92. Given life expectancy
for a 65-year-old woman is 88, that
person could be quite confident that
their pension withdrawals would last
their whole life and they would have
received a healthy £177,000 of income
from their pot in total.”
However, if the charges are increased
to 1.6 per cent while everything else
is kept the same, the fund runs out by
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